Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/56520
Authors: 
Jorra, Markus
Year of Publication: 
2010
Series/Report no.: 
Joint discussion paper series in economics 26-2010
Abstract: 
This paper explores empirically how the adoption of IMF programs affects sovereign risk over the medium term. We find that IMF programs significantly increase the probability of subsequent sovereign defaults by approximately 1.5 to 2 percentage points. These results cannot be attributed to endogeneity bias as they are supported by specifications that explain sovereign defaults and program participation simultaneously. Furthermore, IMF programs turn out to be especially detrimental to fiscal solvency when the Fund distributes its resources to countries whose economic fundamentals are already weak. Our evidence is therefore consistent with the hypothesis that debtor moral hazard is most likely to occur in these circumstances. Other explanations that point to the effects of debt dilution and the possibility of IMF triggered debt runs, however, are also possible.
Subjects: 
IMF programs
sovereign defaults
bivariate probit
international financial architecture
JEL: 
F33
F34
C25
C35
Document Type: 
Working Paper

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